Basic Finance & Accounting Concepts:

“Please do not mug up…just understand the basic concepts”

Accounting Terms

Reconciliation is the adjusting of the difference between two items (e.g., balances, amounts,
statements, or accounts) so that the figures are in agreement. Often the reasons for the
differences must be explained. One example would be reconciling a checking account (bringing
the checking ledger and bank balance statement into agreement).

Reasons for Reconciliation:

1) Cheques deposited into bank but not recorded in the bank book.
2) Cheques issued but not presented in bank.
3) Bank charges directly debited from bank account not mentioned in bank book.
4) ECS, not mentioned in bank book.
5) Interest credited into bank account not mentioned in bank book.
6) Cheques deposited not cleared.

Difference between A/P and A/R:

Accounts Payable
This current liability account will show the amount a company owes for items or services
purchased on credit and for which there was not a promissory note.

Accounts Receivable
A current asset resulting from selling goods or services on credit (on account)

What is corporate restructuring?

Corporate restructuring is necessary when a company needs to improve its efficiency and
profitability and it requires expert corporate management. A corporate restructuring strategy
involves the dismantling and rebuilding of areas within an organization that need special attention
from the management and CEO.

The process of corporate restructuring often occurs after buy-outs, corporate acquisitions,
takeovers or bankruptcy. It can involve a significant movement of an organization’s liabilities or
assets.

A corporate action is an event initiated by a public company that affects the securities (equity or
debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or
coupon payment (for debt securities (bonds)) may have a direct financial impact on the
shareholders or bondholders; another example is a call (early redemption) of a debt security.
Other corporate actions such as stock split may have an indirect impact, as the increased liquidity
of shares may cause the price of the stock to rise. Some corporate actions such as name change
have no direct financial impact on the shareholders.

Purpose

The primary reasons for companies to use corporate actions are:

Return profits to shareholders: Cash dividends are a classic example where a public company
declares a dividend to be paid on each outstanding share.
Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock
suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may
be de-listed. Corporate actions such as stock splits or reverse stock splits increase or decrease
the number of outstanding shares to decrease or increase the stock price respectively. Buybacks
are another example of influencing the stock price where a corporation buys back shares from the
market in an attempt to reduce the number of outstanding shares thereby increasing the price.

Corporate Restructuring : Corporations re-structure in order to increase their profitability.

Mergers are an example of a corporate action where two companies that are competitive or
complementary come together to increase profitability. Spin-offs are an example of a corporate
action where a company breaks itself up in order to focus on its core competencies. Corporate
actions includes, name changes, spin-offs, cash stock mergers, forward and reverse stock splits.
Corporate Actions are the benefits given to the shareholders by their companies.

Types

Corporate actions are classified as Voluntary, Mandatory and Mandatory with Choice corporate
actions.

Mandatory Corporate Action: A mandatory corporate action is an event initiated by the

corporation by the board of directors that affects all shareholders. Participation of shareholders is
mandatory for these corporate actions. An example of a mandatory corporate action is cash
dividend. All holders are entitled to receive the dividend payments, and a shareholder does not
need to do anything to get the dividend. Other examples of mandatory corporate actions include
stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu
and spinoffs. Strictly speaking the word mandatory is not appropriate because the shareholder
person doesn't do anything. In all the cases cited above the shareholder is just a passive
beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory
Corporate Action.

Voluntary Corporate Action : A voluntary corporate action is an action where the share holders
elect to participate in the action. A response is required by the corporation to process the action.
An example of a voluntary corporate action is a tender offer. A corporation may request share
holders to tender their shares at a pre-determined price. The shareholder may or may not
participate in the tender offer. Shareholders send their responses to the corporations agents, and
the corporation will send the proceeds of the action to the shareholders who elect to participate.

Sometimes a voluntary corporate action may give the option of how to get the proceeds of the
action. For example in case of a cash/stock dividend option, the shareholder can elect to take the
proceeds of the dividend either as cash or additional shares of the corporation. Other types of
Voluntary actions include rights issue, making buyback offers to the share holders while delisting
the company from the stock exchange etc.

Mandatory with Choice Corporate Action : A Mandatory with Choice corporate action is a
mandatory corporate action where share holders are given a chance to choose among several
options. An example is cash/stock dividend option with one of the options as default. Share
holders may or may not submit their elections. In case a share holder does not submit the
election, the default option will be applied.

Corporate Actions Information

When a company announces a corporate action, registered shareholders are told of the event by
the company's registrar. Financial data vendors collect such information and disseminate it either
via their own services to institutional investors or via online portals in the case of individual
investors.

Stock split

A stock split or stock divide increases or decreases the number of shares in a public company.
The price is adjusted such that the before and after market capitalization of the company remains
the same and dilution does not occur. Options and warrants are included.

Spin-Offs

A spin-off is a new organization or entity formed by a split from a larger one, such as a television
series based on a pre-existing one, or a new company formed from a university research group or
business incubator. In literature, especially in milieu-based popular fictional book series like
mysteries, westerns, fantasy or science fiction, the term sub-series is generally used instead of
spin-off, but with essentially the same meaning.

Spin-offs as a descriptive term can also include a dissenting faction of a membership

organization, a sect of a cult, or a denomination of a church. In business, a spin-off is essentially
the opposite of a merger. In computing, a spin-off from a software project is often called a fork.

A spin-off product is a product deriving elements of design, branding or function from an

existing product, but which is itself a new distinct product.

Corporate spin-off

The common definition of spin out is a division of a company or organization that becomes an
independent business.

Government spin-off

Civilian goods which are the result of military or governmental research are also known as
spinoffs.

Media spin-off

Media spin-off is the process of deriving new radio, video game, film series, book series or
television programs from existing ones.

Research spin-off

A research spin-off is a new company based on the findings of a member or by members of a

research group at a university.

The term is also used for concepts or products spun off a research project, for example methods
or materials pioneered during the Manhattan Project (spin-off: Commercial Nuclear Power) or
during the Space Race (spin-offs: Many, Integrated Circuits and hence most modern electronics,
freeze-dried foods, satellites, et-cetera, and et al.).

Difference between:
Asset management

* is the management of the financial assets of a company in order to maximize return. It can be
also an account at a financial institution that ...
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* Activities in connection with the management and administration of the assets of the clientele in
different ways.
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* A standard accountancy process concerned with maintaining details of assets above a certain
value and their depreciation. ...
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Asset Servicing

offers clients world-class products, technology and service to help enhance the management,
administration and oversight of their investment process.

Net Asset Value (NAV)

The per share price of a mutual fund. For a no-load fund, NAV is the price received by both
buyers and sellers. For front loaded mutual funds, NAV is equivalent of the bid price (what
shareholders can get for selling a share), while the offering price is the price buyers must pay per
share (and includes front load). The NAV is usually calculated at the end of each trading day by
taking the closing prices of all securities owned plus cash and equivalents and subtracting all
liabilities then dividing by the number of shares outstanding, which for open-end funds, fluctuates
depending on daily number of redemptions and purchases. Many new funds are issued at a NAV
of $10. After a distribution, the NAV falls by the amount equal to the distribution.

What It Is:
Most commonly used in reference to mutual or closed-end funds, net asset value (NAV)
measures the value of a fund's assets, minus its liabilities. NAV is typically calculated on a per-
share basis.

How It Works/Example:
A fund's NAV fluctuates along with the value of its underlying investments. The formula for NAV
is:

NAV = (Market Value of All Securities Held by Fund + Cash and Equivalent Holdings - Fund
Liabilities) / Total Fund Shares Outstanding

A fund's NAV will change daily as the value of a fund's securities, cash held, liabilities, and the
number of shares outstanding fluctuate.

Why It Matters:
Net asset values are like stock prices in that they measure the value of one share of a fund. Also,
they give investors a way to compare a fund's performance with market or industry benchmarks
(such as the Standard & Poor's 500 or an industry index). However, some analysts argue that
comparing long-term changes in a fund's NAV is not as meaningful as comparing long-term
changes in its share price because funds periodically distribute capital gains to their fund holders,
thus reducing their NAV.
Q) What is the difference between stocks and shares?

Ans: “Stock” is a general term used to describe the shares of any company and "shares"
refers to a specific stock of a particular company. So, if investors say they own stocks, they
are generally referring to their overall ownership in one or more companies. If investors say
they own shares - the question then becomes - shares in what company?
Stocks : A type of security that signifies ownership in a corporation and represents a claim on
part of the corporation's assets and earnings.
Shares : A unit of ownership interest in a corporation or financial asset. While owning shares
in a business does not mean that the shareholder has direct control over the business's day-
to-day operations, being a shareholder does entitle the possessor to an equal distribution
in any profits, if any are declared in the form of dividends. The two main types of shares are
common shares and preferred shares.

Capital Markets :

The capital market (securities markets) is the market for securities, where companies and the
government can raise long-term funds. The capital market includes the stock market and the
bond market. It is a place where investors come together to buy and sell shares.

Primary Markets: The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through a
syndicate of securities dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue, this sale is called an initial public offering (IPO).
Dealers earn a commission that is built into the price of the security offering, though it can be
found in the prospectus.

Secondary Market: The secondary market is the financial market for trading of securities that
have already been issued in an initial private or public offering.

Dividend
The periodic, usually quarterly, payment made by a corporation to its shareholders, generally
expressed as dividend per share. Dividends represent earnings that are not reinvested by the
corporation. Some stocks pay no dividends and others, such as utility companies pay
substantial ones that represent a large portion of the total return a shareholder will get from his
investment. Dividends are a type of distribution and are usually taxable in year received.

Equity is, normally, ownership or percentage of ownership in a company.

Equity Share is a) a share or class of shares whether or not the share carries voting rights, b)
any warrants, options or rights entitling their holders to purchase or acquire the shares
referred to under (a), or c. other prescribed securities

What Does Reverse Stock Split Mean?

A reduction in the number of a corporation's shares outstanding that increases the par value of
its stock or its earnings per share. The market value of the total number of shares (market
capitalization) remains the same.

Preference Shares usually, non-voting capital stock that pays dividends at a specified rate and
has preference over common stock in the payment of dividends and the liquidation of assets.
Debenture
A bond issued by a corporation which is secured by the general credit or promise to pay of the
issuer. It is not backed by collateral such as tangible assets.

Derivatives:
Financial instruments, such as futures and options, which derive their value from underlying
securities including bonds, bills, currencies, and equities. Equity derivatives are financial
derivative products whose value is dependent on the value of an underlying share or group of
shares.

Underlying Security
The security that must be delivered when another security is exercised. For example, if a call
option is exercised, then the underlying stock is delivered to the call owner. Warrants, rights,
options, and convertible securities all have underlying securities. For futures options, futures are
the underlying security.

Futures
Investment contracts which specify the quantity and price of a commodity to be purchased or sold
at a later date. On contract date, the buyer must take physical possession or make delivery of the
commodity, which can only be avoided by closing out the contract(s) before that date. Futures
can be used for speculation or hedging.

Option
A contract that gives the owner the right, if exercised, to buy or sell a security or basket of
securities (index) at a specific price within a specific time limit. Usually, they are traded as
securities themselves, with buyers and sellers trying to profit from price changes. They are
generally available for 1 to 9 months, with some longer term options (called LEAPS) also
available for selected securities. Stock option contracts are generally for the right to buy or sell
100 shares of the underlying stock (100 is the multiplier). Trading in options should only be
undertaken by sophisticated investors.

Call Option
A call option gives the owner the right, but not the obligation, to buy the underlying stock at a
given price (the strike price) by a given time (the expiration date). The owner of the call is
speculating that the underlying stock will go up in value, hence, increasing the value of the option.
The purpose can be to speculate with the option (hope it goes up and sell for a profit), to invest in
the underlying stock at a locked in price if the stock price goes high enough, or to generate
income. Each option contract equals 100 shares of stock. For example, an AAA MAR 65 call,
would give the owner the right to buy 100 shares of AAA at $65 (strike price) per share between
now and the third Friday in March (expiration date).

Put Option
A put option gives the owner the right, but not the obligation, to sell the underlying stock at a
given price (the strike price ) by a given time (the expiration date). The owner is speculating that
the option will go up in value and the underlying stock will go down in value. The purpose can be
to either speculate with the option (hope it goes up and sell for a profit) or trade the underlying
stock at a locked in price if the stock price goes down enough. For example, an AAA MAR 65 put
would give the owner the right to sell 100 shares of AAA at $65 (strike price) per share between
now and the third Friday in March (expiration date).

Hedging
An investment strategy of lowering risk by buying securities that have offsetting risk
characteristics. A perfect hedge eliminates risk entirely. Hedging strategies lower return since
there is a cost involved in hedging. For example, a portfolio manager could short a futures
contract which will perfectly offset any decrease in the value of the portfolio. Options and short
selling stock can also be used for hedging. Hedge funds are investment pools that are free to use
any hedging techniques they desire and they often make large bets in a relatively small number
of different holdings.

Intraday Trading
Intraday share trading refers to the buying and selling (or vise versa) of the same script in the
same trading session ( on the same day).

Portfolio Management:
Where assets are combined into a portfolio that fits the investor's preferences (eg, level of
risk) and needs (eg, regular dividends).
The aim of Portfolio Management is to achieve the maximum return from a portfolio which has
been delegated to be managed by an individual manager or financial institution. The manager
has to balance the parameters which define a good investment ie security, liquidity and return.
The goal is to obtain the highest return for the client of the managed portfolio.

Blue Chip Companies:

A blue chip stock is the stock of a well-established company having stable earnings and no
extensive liabilities. Most blue chip stocks pay regular dividends, even when business is faring
worse than usual. They are valued by investors seeking relative safety and stability, though
prices per share are usually high.

Bond A long-term debt instrument on which the issuer pays interest periodically, known as
‘Coupon’. Bonds are secured by COLLATERAL in the form of immovable property. While
generally, bonds have a definite MATURITY, ‘Perpetual Bonds’ are securities without any
maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are
not secured by specific collateral, so as to distinguish them from bonds.

NASDAQ An acronym for National Association of Security Dealers Automated Quotations

System, which is a nationwide network of computers and other electronic equipment that
connects dealers in the over-the-counter market across the U.S. The system provides the latest
BID and ASKING PRICES quoted for any security by different dealers. This enables an investor
to have his or her transaction done at the best price. Due to NASDAQ, the over-the-counter
market in the U.S. is like a vast but convenient trading floor on which several thousand stocks are
traded.

National Stock Exchange (NSE) It is a nationwide screen-based trading network using

computers, satellite link and electronic media that facilitate transactions in securities by investors
across India. The idea of this model exchange (traced to the Pherwani Committee
recommendations) was an answer to the deficiencies of the older stock exchanges as reflected in
settlement delays, price rigging and a lack of transparency.

Volatility
The measure of the tendency of prices to fluctuate widely. Prices of small companies tend to be
more volatile than those of large corporations. Beta is a measure of volatility.

Liquidity
The ability to turn an asset into cash. A highly liquid asset is easy to sell because an active
market exists that sets prices which are continuously adjusted for supply and demand. An
example is a listed stock or mutual fund. A less liquid asset is real estate or a collectible
Lot
A group of identical UNITS (for securities) or nearly identical units (for collectibles) of an
investment that are traded at the same time and price. Open lots are the contents of open
investments and can be long (buys) or short (short sell). Closed lots are the contents of closed
investments and can be long (sell) or short (buy to cover).

Depository A system of computerized book-entry of securities. This arrangement enables a

transfer of shares through a mere book-entry rather than the physical movement of certificates.
This is because the scrips are ‘dematerialized’ or alternatively, ‘immobilized’ under the system.

Bear A person who expects share prices in general to decline and who is likely to indulge in
SHORT SALES.

Bear Market A long period of declining security prices. Widespread expectations of a fall in
corporate profits or a slowdown in general economic activity can bring about a bear market.

Bull A person who expects share prices in general to move up and who is likely to take a long
position in the stock market.

Transfer agent: The person or firm that cancels the shares in the name of the seller and

The complete lifecycle of a U.S equity trade : Order Capture, its execution in the market,
affirmation/confirmation, foreign exchange, clearing, settlement, and reporting.

Mutual Fund

Fund operated by an investment company that raises money from shareholders and invests it
in stocks, bonds, options, commodities or money market securities. The sum of the collected
amount is called ‘Corpus’.

Retained Earnings
Net profits kept to accumulate in a business after dividends are paid.

Custodian
A financial institution that has the legal responsibility for a customer's securities. This implies
management as well as safekeeping.

Bonus Shares The issue of shares to the shareholders of a company, by capitalizing a part of
the company’s reserves. The decision to issue bonus shares, or stock DIVIDEND as in the U.S.,
may be in response to the need to signal an affirmation to the expectations of shareholders that
the prospects of the company are bright; or it may be with the motive of bringing down the share
price in absolute terms, in order to ensure continuing investor interest. Following a bonus issue,
though the number of total shares increases, the proportional ownership of shareholders does not
change. The magnitude of a bonus issue is determined by taking into account certain rules, laid
down for the purpose. For example, the issue can be made out of free reserves created by
genuine profits or by share PREMIUM collected in cash only. Also, the residual reserves, after the
proposed capitalization, must be at least 40 percent of the increased PAID-UP CAPITAL. These
and other guidelines must be satisfied by a company that is considering a bonus issue. )See also
MARKET CAPITALIZATION.)

Subprime
The term used for lending to borrowers at a higher rate than the prime rate as they have a higher
risk of default. Subprime borrowers typically have low credit scores due to prior bankruptcy,
missed loan payments, home repossession etc.
Settlement
The process whereby obligations arising under a derivative transaction are discharged through
payment or delivery or both.

Difference between Journal & Ledger:

Journal : The record of journal entries appearing in order by date. Some refer to the journal as the
book of original entry, since the entries are first recorded in a journal. From the journal the entries
will be posted to the designated accounts in the general ledger. With manual systems there are
likely to be a sales journal, purchases journal, cash receipts journal, cash disbursements journal,
and the general journal.

Ledger :A "book" containing accounts. For example, there is the general ledger that contains the
balance sheet and income statement accounts.

Balance Sheet

A listing of all assets and liabilities for an individual or a business. The surplus of assets over
liabilities is the net worth, or what is owned free of debt. The Liabilities side of the balance sheets
shows the sources of income into the business and the assets side shows how the income has
been utilized.

A Custodial account is a financial account set up for a minor, but administered by a responsible
adult, known as a custodian, because the minor is under the legal age of majority. The custodian
is often the minor's parent. A custodial account can be everything from a bank account to a trust
fund. This type of account usually come with a Coverdell ESA Form a tax advantaged contract. It
deals with successor rights and other contract conditions depending on who issues the form.

In another form, a Custodial Account is an account owned by an individual or institution,

managed by a named party for purposes of rapid distribution of funds in that account. This is
commonly used for petty cash or for transactions that have very limited and clearly defined
payees and transaction types

A company's general ledger account Cash contains a record of the transactions (checks written,
receipts from customers, etc.) that involve its checking account. The bank also creates a record
of the company's checking account when it processes the company's checks, deposits, service
charges, and other items. Soon after each month ends the bank usually mails a bank statement
to the company. The bank statement lists the activity in the bank account during the recent month
as well as the balance in the bank account.

When the company receives its bank statement, the company should verify that the amounts on
the bank statement are consistent or compatible with the amounts in the company's Cash
account in its general ledger and vice versa. This process of confirming the amounts is referred to
as reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing a
"bank rec." The benefit of reconciling the bank statement is knowing that the amount of Cash
reported by the company (company's books) is consistent with the amount of cash shown in the
bank's records.

How does the SHARE MARKETS works?

Share market is a place where companies list their shares available to common public for buying
& selling.
these shares are now mostly held in demat form, i.e. electronic and not physical.
share - a share entitles you to own a certain % of the company. if the company has total 100
shares listed and you buy 1, then you are 1% owner of the company and are entitled to
participate in AGM, vote for general resolutions or receive dividends (money) if the company
declares some.

at the end of the day, all shares in company are summed up - total buy and total sell. this should
tally by the end of 2 days (T+2). this means that if you sell 1 share today, you need to transfer 1
share from your account so that it can be given to someone else who has bought 1 share. this
entire process should be complete within 2 days.

complications start from here and if i write more, you will start getting confused. you can read up
100s of articles on stock markets on the net. you can post further questions if they are more
specific.

Stock Market Basics

What is a Stock Exchange? A common platform where buyers and sellers come together to
transact in stocks and shares. It may be a physical entity where brokers trade on a physical
trading floor via an "open outcry" system or a virtual environment.

Why does one need a broker? As per SEBI (Securities and Exchange Board of India.)
regulations, only registered members can operate in the stock market. One can trade by
executing a deal only through a registered broker of a recognized Stock Exchange or through a
SEBI- registered sub-broker.

What is a contract note? A contract note describes the rate, date, time at which the trade was
transacted and the brokerage rate. A contract note issued in the prescribed format establishes a
legally enforceable relationship between the client and the member in respect of trades stated in
the contract note. These are made in duplicate and the member and the client both keep a copy
each. A client should receive the contract note within 24 hours of the executed trade. Corporate
Benefits/Action

What is a Bonus Issue? While investing in shares the motive is not only capital gains but also a
proportionate share of surplus generated from the operations once all other stakeholders have
been paid. But the distribution of this surplus to shareholders seldom happens. Instead, this is
transferred to the reserves and surplus account. If the reserves and surplus amount becomes too
large, the company may transfer some amount from the reserves account to the share capital
account by a mere book entry. This is done by increasing the number of shares outstanding and
every shareholder is given bonus shares in a ratio called the bonus ratio and such an issue is
called bonus issue. If the bonus ratio is 1:2, it means that for every two shares held, the
shareholder is entitled to one extra share. So if a shareholder holds two shares, post bonus he
will hold three.

What is a Split?A Split is book entry wherein the face value of the share is altered to create a
greater number of shares outstanding without calling for fresh capital or altering the share capital
account. For example, if a company announces a two-way split, it means that a share of the face
value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one share
now holds two shares.

What is a Buy Back? As the name suggests, it is a process by which a company can buy back
its shares from shareholders. A company may buy back its shares in various ways: from existing
shareholders on a proportionate basis; through a tender offer from open market; through a book-
building process; from the Stock Exchange; or from odd lot holders.

A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot
transactions or through any private arrangement. Clearing and Settlement

What is a settlement cycle?The accounting period for the securities traded on the Exchange.
On the NSE, the cycle begins on Wednesday and ends on the following Tuesday, and on the
BSE the cycle commences on Monday and ends on Friday. At the end of this period, the
obligations of each broker are calculated and the brokers settle their respective obligations as per
the rules, bye-laws and regulations of the Clearing Corporation.

If a transaction is entered on the first day of the settlement, the same will be settled on the eighth
working day excluding the day of transaction. However, if the same is done on the last day of the
settlement, it will be settled on the fourth working day excluding the day of transaction.

What is a rolling settlement?The rolling settlement ensures that each day's trade is settled by
keeping a fixed gap of a specified number of working days between a trade and its settlement. At
present, this gap is five working days after the trading day. The waiting period is uniform for all
trades.

When does one deliver the shares and pay the money to broker?As a seller, in order to
ensure smooth settlement you should deliver the shares to your broker immediately after getting
the contract note for sale but in any case before the pay-in day. Similarly, as a buyer, one should
pay immediately on the receipt of the contract note for purchase but in any case before the pay-in
day.

Equities

What is equity? Funds brought into a business by its shareholders is called equity. It is a
measure of a stake of a person or group of persons starting a business.

What does investing in equity mean? When you buy a company's equity, you are in effect
financing it, and being compensated with a stake in the business. You become part-owner of the
company, entitled to dividends and other benefits that the company may announce, but without
any guarantee of a return on your investments.

What is fundamental analysis? The analysis of factual information like financial figures, balance
sheet, and other information publicly available is known as fundamental analysis. This information
is used to derive a fair price of the share of the company. The faithful fundamentalists believe that
the market incorporates all facts relating to the financial performance of the company. But a
systematic analysis will ensure a more accurate valuation of the price. Fundamental analysts use
tools such as ratio analysis (P/E, MV/BV) and discounted cash flow analysis in order to arrive at
the fair value of a company and hence its share.

What are financial ratios? A ratio is a comparison of two figures. They are culled from the
financial statements of a company. These help in assessing the financial health of a company. It
could be a ratio between an item from a balance sheet versus another item on the balance sheet.
Or it could be a ratio between one figure of the balance sheet with a figure from Profit and Loss
account or it could be comparison of one year's figure with a figure from the previous year. For
example Return on Equity = Net profit (A Profit and a Loss figure) divided by Net Worth (a
balance sheet figure) in percentage terms.

What are the various kinds of financial ratios?

There are many financial ratios. Some of the better known include: Liquidity Ratios: Liquidity ratio
measures the ability of a firm to meet its current obligations. Liquidity ratios by establishing a
relationship between cash and other current assets to current obligations give measure of
liquidity.

e.g. Current ratio [CR] = Current Assets/Current liabilities.

A high CR ratio (>2.5) indicates that a company can meets its short term liabilities. Leverage
Ratios: Leverage ratio indicates the proportion of debt and equity in financing the firm's assets.
They indicate the funds provided by owners and lenders. e.g -----Debt-equity ratio (D-E ratio) total
long term debt/net worth. A high D-E ratio indicates that the company's credit profile is bad.
Activity Ratios: Activity ratios are employed to evaluate the efficiency with which firms manage
and run their assets. They are also called turnover ratios. e.g-- Sales Turnover ratio = sales/total
assets .A Sales Turnover ratio indicates how much business a company generates for every
additional rupee invested.

Profitability Ratios: These ratios indicate the level of profitability of the business with relation to
the inputs or capital employed. Some better-known profit ratios include operating profit margin
(OPM). Operating profit margin is a measure of the company's efficiency, either in isolation or in
comparison to its peers.

What is EPS, P/E, BV and MV/BV?

Earning Per Share (EPS): EPS represents the portion of a company's profit allocated to each
outstanding share of common stock. Net income (reported or estimated) for a period of time is
divided by the total number of shares outstanding during that period. It is one of the measures of
the profitability of common shareholder's investments. It is given by profit after tax (PAT) divided
by number of common shares outstanding.

Price Earning Multiple (P/E): Price earning multiple is ratio between market value per share and
earning per share.

Book Value (BV): (of a common share) The company's Net worth (which is paid-up capital +
reserves & surplus) divided by number of shares outstanding.

Market value to book value ratio (MV/BV ratio): It is the ratio between the market price of a
security and Book Value of the security.

Corporate Benefits/Action

What is a book-closure/record date? Book closure refers to the closing of register of the names
or investors in the records of a company. Companies announce book closure dates from time to
time. The benefits of dividends, bonus issues, rights issue accruing to investors whose name
appears on the company's records as on a given date, is known as the record date. Thus, book
closure and record date help a company determine exactly the shareholders of a company as on
a given date. An investor might purchase a share-cum-dividend, cum rights or cum bonus and
may therefore expect to receive these benefits as the new shareholder. In order to receive this,
the share has to be transferred in the investor's name, or he would stand deprived of the benefits.
The buyer of such a share will be a loser. It is important for a buyer of a share to ensure that
shares purchased at cum benefits prices are transferred before book-closure. It must be ensured
that the price paid for the shares is ex-benefit and not cum benefit.

What is the difference between book closure and record date? In case of a record date, the
company does not close its register of security holders. Record date is the cut off date for
determining the number of registered members who are eligible for the corporate benefits. In
case of book closure, shares cannot be sold on an Exchange bearing a date on the transfer deed
earlier than the book closure. This does not hold good for the record date.

What is a no-delivery period? Whenever a company announces a book closure or record date,
the Exchange sets up a no-delivery (ND) period for that security. During this period only trading is
permitted in the security. However, these trades are settled only after the no- delivery period is
over. This is done to ensure that investor's entitlement for the corporate benefit is clearly
determined.

What is an ex-dividend date? The date on or after which a security begins trading without the
dividend (cash or stock) included in the contract price.

What is an ex-date? The first day of the no-delivery period is the ex- date. If there is any
corporate benefits such as rights, bonus, dividend announced for which book closure/record date
is fixed, the buyer of the shares on or after the ex -date will not be eligible for the benefits.

Why is "new share dividend" deducted from the sale price of shares?In case a company
issues new shares in any financial year, then these shares are eligible only for pro rata dividend
in respect of the financial year in which these are issued. The old and the new shares thus carry
disproportionate rights as to dividend, although their market price remains the same. To
compensate the buyer to whom these new shares are delivered for loss of pro rata dividend, the
seller of new shares has to pay to the buyer, the dividend declared in respect of old shares. This
old-new compensatory value is called as new share dividend. The Exchange publishes a list of
the scrip’s that are eligible to receive the pro rata dividend per settlement.

What is short selling?It is a sale of a security that the seller does not own, or any sale that is
completed by the delivery of a security borrowed by the seller. Short selling is a legitimate trading
strategy. Short sellers assume the risk that they will be able to buy the stock at a more favourable
price than the price at which they sold short.

What is Demat?Demat is a commonly used abbreviation of Dematerialisation, which is a process

whereby securities like shares, debentures are converted from the "material" (paper documents)
into electronic data and stored in the computers of an electronic Depository. You surrender
material securities registered in your name to a Depository Participant (DP). These are then sent
to the respective companies who cancel them after dematerialisation and credit your Depository
Account with the DP. The securities on dematerialisation appear as balances in the Depository
Account. These balances are transferable like physical shares. If at a later date you wish to have
these "Demat" securities converted back into paper certificates, the Depository can help to revive
the paper shares.
What is the procedure for the dematerialisation of securities?Check with a DP as to whether
the securities you hold can be dematerialised. Then open an account with a DP and surrender
the share certificates.

What is a Depository? A Depository is a securities "bank," where dematerialised physical

securities are held in custody, and from where they can be traded. This facilitates faster, risk-free
and low cost settlement. A Depository is akin to a bank and performs activities similar in nature.
At present, there are two Depositories in India, National Securities Depository Limited (NSDL)
and Central Depository Services (CDS). NSDL was the first Indian Depository. It was inaugurated
in November 1996. NSDL was set up with an initial capital of Rs 124 crore, promoted by Industrial
Development Bank of India (IDBI), Unit Trust of India (UTI), National Stock Exchange of India Ltd.
(NSEIL) and the State Bank of India (SBI).

IPOs

What is an IPO? An IPO is an abbreviation for Initial Public Offer. When a company goes public
for the first time or issues a fresh stock of shares, it offers it to the public directly. This happens in
the primary market. The primary market is where a company makes its first contact with the
public at large.